If the cap doesn’t fit, give it up, George! Exploring the evidence and theory behind the Chancellor’s 2012 Budget 2012 proposal for an income tax relief cap to include charitable donations 21st May 2012 Dr Catherine Walker Head of STEAM Directory of Social Change 24 Stephenson Way London NW1 2DP ___________________________________________________________________________________________ © 2011 Directory of Social Change Summary In the Budget 2012 the Chancellor casually announced, with no forewarning, a cap on income tax reliefs to include charitable giving schemes. A mad scramble for hard data on the potential effects of this ensued with little agreement on figures from either side. This paper summarises the issues involved and proposes some new figures based on our own and others calculations. We estimate that the proposed income tax relief cap could save HM Treasury £100 million in tax on charitable gifts, while charities could lose out by £500-£600 million in donations. And this may be a very conservative estimate, because donors don’t just react to the price of giving, they are also influenced by the culture within which they are giving. We argue that the real effect could be multiplied many times due to the negative messages this cap is giving out about giving. It is this psychological effect of the proposed cap which is the hardest to quantify, yet potentially the most damaging, and the hardest to rectify if this situation goes on for much longer. Background It’s been an incredible couple of months for charity tax experts and amateur enthusiasts. Rather like trainspotting becoming headline news. George Osborne’s apparently throwaway line in the budget about capping the amount of income tax relief claimable by higher rate tax payers, including reliefs on charitable giving, has caused a furore. As the equivalent of whopping a tax onto charitable giving for the rich it’s almost as bonkers as the pasty tax. The basics are that there are a number of tax-efficient giving schemes in the UK which work in the following way: gifts of money, shares and property to charity attract a tax relief for higher-rate taxpayers (to offset against their income). The proposed income tax relief cap would mean that individuals would only be able to claim income tax relief against 25% of their income or £50,000 (whichever is greater), effectively lowering the amount which qualifies for tax relief (in both charitable and non-charitable schemes). Against a backdrop of Big Society and policies and rhetoric designed to encourage charitable giving and a strong and healthy voluntary sector in the UK, this is a very strange move by the Treasury, and one which seems to have come out of the blue, catching almost everyone offguard. It all started as a simple tax-avoidance measure, to counter “unlimited income tax reliefs”, and the situation where: “Currently individuals can offset their entire income against income tax reliefs, and as a result pay no income tax at all.” No arguments there, however the inclusion of charitable donations and community interest tax relief (CITR) in this measure has turned it into a whole different ball game. So why include charitable giving in this? Has it just been caught in the crossfire as so much collateral damage in a bigger war HMRC and the Treasury are fighting against tax- avoidance? Yes, quite possibly, but does this excuse it? No. Especially when HMRC and HMT seem unwilling to exclude it, committing only to: The Government will explore with philanthropists ways to ensure that this measure will not impact significantly on charities that depend on large donations. (Red Book 1.193). The outcry from the voluntary sector has been immense. The Give it Back, George campaign, headed up by NCVO, CAF and the Philanthropy Review has gathered nearly 3500 supporters1, and HMRC, the Treasury and the Office for Civil Society have been deluged with lobbyists from charities across the country. The Labour party has even threatened to table a Finance Bill amendment to block the cap until the Government can prove that it will not adversely affect charities. Even Tony Blair’s been wheeled out to urge a U-turn while there is plenty of onside opposition too; for example Lord Wei, former architect of Big Society, has said that it is further proof that the Treasury oppose the concept of Big Society as a “threat to its central control”; while Stanley Fink, Tory Party Treasurer, said that it would definitely “put people off” donating. PR lessons: how to turn a bad day into an ‘omnishambles’ As the Give it back, George campaign pressure mounts with the PM being hounded ‘from Derby to Indonesia’ for comments, a special Newsnight report, and even making the front page of Private Eye, Treasury and HMRC have been backed into a corner from which position they appear to have resorted to name-calling. They seem not to have followed the old adage ‘when you’re in a hole, first stop digging.’ From a starting point of equating charitable giving as tax-dodging you wouldn’t have thought it could get much worse, but you’d be wrong as no less than the PM’s spokesman then came out with the line that some of the wealthy are giving to “charities that do very little charitable work”2. In a stroke the messaging had gone from giving = tax evasion to charities = fraud; all in complete contradiction with the Government’s own agenda to incentivise and promote charitable giving3. Of course it’s not that the voluntary sector isn’t against tax avoidance by the rich (or anyone for that matter), far from it; more that the message coming out of Government with this policy equates charitable giving with tax avoidance; and as many have been quick to point out: there’s a big difference between a gift to charity and an offshore bank account (such as those favoured by many of our high street banks and big name businesses (as I pointed out in a previous blog)). But the fact is that there is an extremely rigorous system of checks and balances in place in the UK to make sure that registered charities do charitable things for the public benefit. It’s called the Charity Commission (or OSCR in Scotland, CCNI in Northern Ireland4). Not only 1 As at 14th May 2012. 2 This line was repeated by Dave Hartnett, Permanent Secretary for Tax at HMRC, in his address to the Charity Tax Group when he talked about “charities with inappropriate beneficiaries” and that “some activity was simply fraudulent” and gave some off-the-cuff no-names examples (Hartnett, 2012). 3 And as for the recent ‘revelation’ in the press that many rich people pay little tax (given as one reason for the proposal) much to the apparent consternation and shock of Chancellor George Osborne (despite many of them being close friends and colleagues) well it’s beyond parody really. 4Something those in power would do well to remember as they continue to carry out swingeing cuts of 30% to the charity policeman’s budget. that, but HMRC also has a track record of hunting and capturing those who attempt to defraud the system using charity tax reliefs using existing anti-avoidance legislation, and last year brought in the controversial ‘fit and proper persons’ test to add another layer of scrutiny to Gift Aid. HMRC’s repeated regulatory land-grabs are legendary in the charity sector; their duplication of existing checks and systems making a nonsense of the Government’s ‘one out, one in’ rule for new regulation. Where’s the evidence? So where’s the evidence to show how many are and how much is involved in tax avoidance through charitable giving; or the impact assessment of the likely effect on charities; or how much tax revenue is expected to be raised by such a measure? ....Silence… …Nada… …Nothing… And therein lies the heart of the problem. There is a dearth of real evidence, one way or the other. As ever, the Government’s tactic in fending off criticism has been to demand evidence from charities of the impact – as opposed to basing their policies on sound evidence in the first place. So much for evidence-based policy. While it might seem churlish to point out that the sector can barely sneeze into a Government-funded hanky without being asked for an impact assessment of the trajectory, penetration and likely reach of the germs, they have been less than forthcoming with any solid basis or reasoning behind this little piece of kitchen sink policy-making. So it’s really hard to assess whether in reality this is all a storm in a teacup, as the Minister for Civil Society, Nick Hurd, has tried to reassure us in Third Sector, saying that: “For the vast majority of the sector....it doesn’t have much impact.” Or whether we should rather believe surveys by the Charities Aid Foundation which found that 37.5% of (183) high net worth donors giving more than £50,000 per year would reduce their giving because of the cap, and that 55% of the general public thought the Government should rethink the cap, and that 93% of backbenchers agreed that the Government should do all it can to use the tax system to encourage charitable donations from the wealthy, while 65% thought charitable donations should be exempt. We were told (off the record), after the budget that HMRC didn’t anticipate that charitable giving would be much affected as it makes up only a small portion of this whole income tax avoidance issue – about 20% it has been estimated (by Faisal Islam); and much later the Treasury revealed that it expected to raise a mere £100 million in this way.